1. Budget Classification
Basic PFM Training Program
The World Bank Group
June 13-15, 2011
Nataliya Biletska, PRMPS

2. Overview Why is Budget Classification Important?
Defining Budget Classification
Types of Budget Classification
Economic, Functional and Program Classification of Expenditures
Differences Between GFS 1986 and GFS 2001 Budget Classifications
Key Issues in Implementing GFS 2001 Budget Classification System
Bank’s Project Reporting and GFS 1986 and GFS 2001 Budget Classifications Systems

3. Why is Budget Classification Important?
At the core of the functions of a budget:
Strategic planning, policy formulation and performance analysis
Efficient resource allocation across sectors
Compliance with budgetary resources appropriated by parliament
Thus
One of the fundamentals of a budget
management system
Normative framework for policy
decision-making and accountability

4. Defining Budget Classification
Systemic way of categorizing and structuring budgetary information which is provided to government managers, policymakers, the legislature, and the general public
Format for the budget preparation, presentation and reporting which thus determines the coherence and transparency of the budget
Coding system aimed to produce meaningful and accurate information
A sound budget classification system should contain:
Classification of revenues into various categories
(tax and other than tax revenue; taxes by tax base)
Administrative, economic and functional classifications
of expenditures

5. Types of Budget Classifications
International Standards
Main:
Economic
Functional
Administrative
organized by a government entity responsible for managing the allocated funds
IMF’S Government Finance Statistics Manual (GFSM) 2001
Accrual basis
Replaced cash-basis GFSM 1986 (incorporating UN’S COFOG)
Consistent with SNA 1993
Other:
Program — indicates a set of specific policy objectives to be achieved with the provided resources
Source of fund (on-budget, extra-budgetary, counterpart funds)
Geographical location (administrative units, taxpayers, recipients of government transfers) etc.

6. Economic Classification (GFSM 2001)
Determined by the type of expenditure incurred
“Expense” replaces “expenditure” because of accrual basis
All line items are equally applicable to accrual-basis GFS 2001 and cash-basis GFS 1986, with one exception—consumption of capital
Includes current expenditure and capital transfers but excludes capital expenditure as in GFS 1986
Acquisition of fixed capital assets, purchases of stocks, land and, intangible assets are recorded as transactions in nonfinancial assets
Capital transfer when ownership of a capital asset is given up without any compensation
O&M spending is an expense, while major improvements are acquisitions and added to the existing value of an asset
Independent of the administrative classification, but can be incorporated for each government organization and its subdivisions
Main Categories:
21 - Compensation of employees
22 - Use of goods & services
23 - Consumption of fixed capital
24 - Interest
25 - Subsidies
26 - Grants
27 - Social benefits
28 - Other expense

7. Functional Classification (GFSM 2001)
Categorizes government activities based on their broad objectives
Facilitates the analysis of resource allocation among sectors and the impact of fiscal policies
Distinct from the administrative structure of the government
Fully consistent with COFOG and comprises 10 major government functions, further divided into groups and subgroups
COFOG system often adapted to a country’s particular policy needs (mapping tables between COFOG and classification used)
Main Categories:
701 - General public services
702 - Defense
703 - Public order & safety
704 - Economic affairs
705 - Environmental protection
706 - Housing & community amenities
707 - Health
708 - Recreation, culture & religion
709 - Education
710 - Social protection

8. Program Classification
Groups expenditure by common policy objective
Key purposes: (1) establish specific goals for budgetary spending and (2) improve operational performance by adopting performance measures
Basic information tool for many performance budgeting systems
Thus serves not only for budgetary planning and reporting but mainly for promoting budgetary decision-making – better aligning government activities with policy priorities
Economic classification still needed in programmatic structure
Capture cost information to link economic inputs to program results
Incorporate current and capital inputs of a particular program

9. Program Classification Combined with Functional and Economic
Program classification inherently disconnected from government’s organizational structure
Contemporary approach: to place each program under a single ministry and align it with the functional classification
Ensures clear assignment of responsibility for a program and accountability for results
Function
Program
Economic
Main Function
Economic Affairs
Ministry
Ministry of Agriculture and Forestry
Main classification (Section)
Expenses
Agriculture, Forestry Fishing & Hunting
Assisting the breeding
Subclassification (Article)
Use of goods & services
Sub-function
Agriculture
Program Manager
General Director for Agriculture
Other Information (Paragraph)
Training of staff
Managing Unit
Human Resources Division
Subprogram
Training of poultry farmers
Source: Budget Classification, IMF FAD Technical Note by Davina Jacobs, Jean-Luc Helis, and Dominique Bouley, 2009.

10. Differences Between GFS 2001 and GFS 1986
Pertain to coverage, recording basis, definitions, classifications and balancing items
Three fundamental changes:
General government sector
Accrual basis of recording
The analytic framework

11. Difference 1: General Government Sector
GFSM 2001 is based on general government sector which consists of all resident government units and all resident nonprofit institutions that are controlled and financed by government (consistent with SNA 1993)
GFSM 1986 is defined on functional basis and thus excludes transactions that do not involve the implementation of fiscal policy (e.g. monetary authority)
General Government
Central Government
General Government
Central Government
Provincial Governments
Provincial Governments
Local Governments
Local Governments

12. Difference 2: Accrual basis of recording
Accrual-basis GFSM 2001 – revenues are recognized when earned and expenses are recognized when incurred
Cash-basis GFSM 1986 – transactions are recorded when cash is received or paid
Changes ensuing from accrual principles:
Broader coverage of economic events – all transactions affecting assets, liabilities, revenue, or expense rather than just cash transactions
Introduction of net worth and balance sheet to government operations
Integration of flows and stocks – allows reconciliation of differences between the opening and closing balance sheets
Valuation – assets and liabilities are valued at current market prices rather than nominal value, including debt securities
Definition of revenue and expense – correspondingly an increase or decrease in net worth resulting from a transaction and thus excludes proceeds from or purchases of nonfinancial assets
Classification – revenue categories are revised and include taxes, social insurance contributions, grants, and other revenue while, in GFSM 1986, they are comprised of tax, nontax, or capital revenue, and grants

13. Difference 3: The Analytic Framework
GFSM 1986 is focused on a single balancing item (overall deficit/surplus)
GFSM 2001 includes several balancing items which provide a variety of considerations for analysis of general government’s financial position
Most important:
Net operating balance – the difference between revenue and expense that measures the change in net worth resulting from transactions
Overall balance which is net lending/borrowing with an adjustment in treating transactions in assets/liabilities designated for policy purposes (=overall deficit/surplus in GFSM 1986 but based on accrual basis)
Cash surplus/deficit – the balance of cash flows from the government operations and the net acquisition of nonfinancial assets
Change in net worth related to Balance Sheet is the preferred measure for assessing fiscal sustainability

14. Key Issues in Implementing GFS 2001 Budget Classification System
Political commitment at a high level is critical for ensuring approval of changes to the budget legal framework, sustainability of the reform, and effective utilization of the adopted budget classification and financial reporting
Technical capacity at MoF, budget departments in line ministries, and other budgetary institutions is key for maintaining the system and adapting it to the future needs
IT System assists reclassification of entries and strengthens functionality of budget administration and reporting (IFMIS)
Migrating to GFS 2001 system is a lengthy process (over 50 countries report their data using the GFSM 2001 framework)
Possible approaches to transition:
simply reclassify the cash-based data into the GFSM 2001 framework and make a best effort to complete the balance sheet
adjustments to the cash data (e.g. recognition of in-kind transactions)
accrual accounting for the source data

15. Budget Classification and Chart of Accounts (COAs)
Budget classification comprises a coding system used for revenue and expenditure transactions at all stages of the budget process—preparation, approval, and execution
COAs is a basis of recording accounting transactions and balances (flows and stocks) in the general ledger and thus is used for administrating and reporting on financial transactions of government entities
Good practice: integrated COAs and budget classification to meet various reporting requirements
Possible solutions for partially integrated (e.g. Francophone countries) or separate (e.g. Mexico):
Central database: allows for one data entry (for each entry in the budget classification, there is a corresponding entry in the accounting classification)
Separate presentation: a specific class of operations in the accounting classification
Bridge tables to align the structure and coverage of both classifications

16. Bank’s Project Reporting and GFS 1986 and GFS 2001 Systems
Key issue: Is a country’s budget classification system
(GFS 2001 or GFS 1986) sufficient?
Requirements:
Reporting on the whole project, including Bank funding, counterpart government funding, and other donor funding
Reporting by functions/sub-functions of the budget (for a large project covering several functions/sub- functions)
Tracking individual project expenditures (both capital and recurrent, captured by the economic classification at a project level)
Challenge: Flexibility of the classification system to create a line-item in the budget for a Bank financed project
Easy collation of data is important for monitoring project expenditures
Accrual-basis is desirable but both the cash-based GFS and the accrual-based 2001 GFS suffice Bank’s requirements